Vad's Best Ideas

"Nobody rises to low expectations"

One of the key principles that I found to work for me in investing is to be flexible at all times. I make statements or investments that I believe to be correct at the time but once situation changes I have to act quickly and thus I frequently modify my recent opinions/trades as new information becomes available.

For example I believe that current market expectations for a significant (50BP) cut next week are greatly exaggerated. The are several reasons to think so- but the main one is that I believe that as a good and competent economist Bernanke is primarily focused on keeping inflation low and thus until data shows that inflation fight is over he won't make his move.

It is way too early to state that fight is over- prices of various commodities are still hitting new all time highs, unemployment is at multi year lows, food inflation has not yet slowed significantly. Yes housing prices are down slightly but has it become any cheaper to rent an apartment, which is I think by the way a more reliable indicator for shelter related portion of inflation? I don't see that yet in the data quite yet.

Certainly we would expect there is always some lag between monetary action and economic performance. So I guess if one believes that all signs are pointing to zero economic growth in the 1st quarter 2008 (I think it is possible that happens) may be Fed should act during the next meeting? May be they will- but I expect the cut (if there is one) will be minimal -25BPs with a statement that while economy has slowed considerably it is still expanding. I also think that Fed under Bernanke will be more patient than it was under Greenspan and thus over time market expectations of swift cuts will decline which will probably result in lower overall willingness to risk taking by more speculative market players.

What does it all mean? Here is what I am doing- first of all I am avoiding jumping too heavily on the materials/oil and gas bandwagon. As they say "Every bull market has a copper roof". Copper is ripe for a significant correction as new capacity comes on board. I also think that $75 per barrel of oil price is not sustainable long term, but I alos don't believe that market is pricing it that way in O&G stocks anyway; prices probably reflect something closer to $50-60 right now. Absent some significant supply shock I think that price is $10-15 too high. That means that while there are some opportunities out there in the O&G sector- I would expect the sector overall to move inline with the rest of the market or even underperform slightly...

I think the two sectors that will outperform in the next 12 months are IT and Healthcare. Not all healthcare or IT is the same though. I am not so keen on jumping onto Apple or RIMM bandwagon like many other contesters in SLO challenge. Both are great companies that will be successful long term but way too expensive at this point. I think AAPL made a huge mistake of releasing the iPhone exclusively with AT&T and will pay for that in the short term. Edge network is so lame that it is not even funny... iPod touch is going to be hot, I know I will buy one, but it won't make up for slowing growth of regular iPods- it is harder to grow of higher base but at this price market expect the growth to continue... GRMN on the other hand is a great company that will benefit from the overall GPS craze this Christmas and thus I think it will outperform both AAPL and RIMM in the next 12 months.

Anyway here we go my favorite topic again-"Subprime lenders" - this sector is going to be the main beneficiary of what I expect the Fed related expectations are today. I do think that a few more companies could go bankrupt- one of my current holdings- NFI could very well be one of them, but I don't that will happen before the end of September. If Fed does make a move- I expect more volatile sub prime lenders (NFI, FMT, DFC, IMH) to make double digit moves up, if Fed does not move- there isn't much downside for the overall sector due to what I expect would be consolidation expectations.

However one should be careful when buying those- my advice is to only buy the relative weakness in this sector for now- for example, the reason I bought NFI and IMB last week was that both stocks declined in high double digits while the rest of the sector stayed in single digits? Is the Subprime problem company specific? I don't think so and thus such a large price discrepancy in a short period of time is not warranted regardless of company specific announcements unless they are Bankruptcy related. I doubled down early Friday when both IMB and NFI gapped down- the result is that both positions are in black again.

Will I wait for the Fed to act? I am not sure at this point, however, I think there will be at least one suprime rally prior to the announcement- if it satisfies my double digit requirement for taking so much risk I will sell without looking back.

To sum it up- "Vad's short term recipe" to play the Fed- "Buy most beaten subprime lenders on a day of heavy weakness/double digit declines. Don't be afraid to double down once or twice but also be careful -don't overload the portfolio because ALL of them, except may be the bigger ones like CFC, TMA or IMB, are subject to going BK at any time. I don't think that will happen in September but better safe than sorry.

Trade safe and cheers,
Vad

Comments: View Comments |  Sunday September 9, 2007